Inventory Financing

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inventory-financing

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    What is an Inventory Financing?

    Inventory financing allows you to leverage existing inventory to secure additional working capital. The amount of money you can qualify for is primarily based on the percentage of the total inventory value to be put up as collateral.

    The amount of money you can borrow against your inventory varies depending on the following factors:

    • Your industry
    • Type of inventory used as collateral
    • Inventory churn

    Inventory financing, also known as Inventory loans, are commonly used by companies with large quantities of inventory, like wholesalers, retailers, construction, and more. You can use the funds for almost any business purpose, including preparing for the peak season, expanding product lines, securing additional capital to keep up with customer demand, and unlocking capital tied to unsold or unused inventory.

    Like a conventional small business loan, an inventory loan gives small businesses a lump sum of money upfront. In exchange, they pledge their business’ inventory as security. Inventory loans are repaid in monthly payments over a set term or in one lump sum.. You will be liable to repay the entire loan amount, and if you require additional funding, you will need to take out another small business inventory loan.

    Inventory is defined as any merchandise, materials, or goods that a small business holds and sells in order to make profit. When pledged as an asset, the lender puts a lien on the entirety of the inventory. This gives them the right to seize the inventory if the business defaults on the business loan.
    Companies can apply for inventory loans from traditional banks, such as those that offer the SBA loans, and online lenders. They’ll appraise the worth of the merchandise you want to buy and calculate how much money you can borrow.

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    Loan Amounts

    $25,000 – $10,000,000+

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    Rates

    Starting at 7.25%

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    Speed

    Less than 30 days

    Types of Inventory Financing

    Whereas both types of inventory financing use your inventory as security, these two loan types have significant implications for your business’s future funding.

    • Inventory Loan
    • Inventory Line of Credit

    Ready to apply for Inventory Financing?

    What are the Types of Inventory Used for Inventory Financing?

    The most common types of inventory are raw materials, works in progress (WIP), and finished goods.

    These types of inventory have value, but for lenders, some are more valuable than others. The rule of thumb is that the more liquid your inventory, the higher your loan-to-value (LTV) ratio. In the event that you are unable to repay the loan, lenders will sell the inventory you placed as collateral. The easier it is for them to sell it, the higher its value.

    Raw materials are generally very easy to liquidate, which makes this type of collateral an appealing form of inventory for both banks and online lenders to consider as collateral. As long as there is a market for the sale of the inventory products, finished goods inventory can be an attractive form of inventory to use as collateral to secure inventory financing.

    However, work in progress or WIP inventory is usually not as valuable to lenders because they’re usually sold for just the melt-down or material value of the products, which could be valued at only pennies on the dollar, depending on the type of product.

    Speak with our Lending Advisor Today to learn more about inventory loans!

    What are the benefits of Inventory Financing?

    Ready to apply for Inventory Financing?

    How does Inventory Financing work?

    The Underwriting Process and Documents Needed

    You’ll need the following documents to apply for inventory loans at SMB Compass:

    • 1 Page online loan application
    • At least 6 months’ worth of bank statements
    • At least 2 years in business

    Note that we may ask for additional documents if needed, such as profit and loss statements, balance sheets, A/R and A/P aging reports, inventory reports, and more. Our financial experts will advise you on the documents you need to submit.

    Your lender will conduct field audits and inventory valuations as a part of the funding process. This process determines the final approval and loan amount of your inventory loan or line of credit.
    During the field audit, the lender, or a representative on their behalf, will visit the location of the inventory to evaluate the value of the collateral that will be used to secure the funds. This audit will determine how much money the lender will offer for the inventory as collateral, and this is usually based on the amount that the inventory could be sold for in case the borrower defaults on the loan. After the reports are received and the final approval is issued, you may be able to borrow up to 80% of the appraised value of the inventory.

    You will receive a term sheet that outlines the inventory loan amount, the advance rate, interest rate, and other associated fees. If you accept the terms and sign the sheet, you will need to make a deposit for the field audit and diligence.

    Ready to apply for Inventory Financing?

    What are the Rates and Fees for Inventory Financing?

    The rates and fees for inventory financing vary depending on the following factors:

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    Are You Eligible for Inventory Financing?

    Again, the eligibility requirements may vary from lender to lender. But generally, your business should meet the following requirements to qualify:

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    Is Collateral required for inventory financing?

    Yes, inventory financing is a specific asset-based lending product. The collateral required is the inventory that the loan is being secured with. The type of inventory being used as collateral and the liquidation cost of the inventory both play a large role to determine the necessary collateral.

    Ready to apply for Inventory Financing?

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    FAQ

    How do you qualify for inventory Loans?

    Lenders need to determine the value of the inventory in the event that the borrowing business is not able to pay back the loan and the inventory needs to be sold to a third party. The value of the inventory that will be purchased itself is usually what the lender uses as collateral to secure the funds – the higher the value of the inventory being used for collateral, the more money that the borrowing business will receive from the lender.

    How long does the application process take for inventory financing?

    Although the application process may require a surplus of documents, the timeframe to secure inventory loans is typically not very lengthy. The timeframe is often dependent on the preparation of the applicant business, if the business owner has the necessary documents readily available, the application process will usually be much quicker. Recently, with the increase of Internet services that offer inventory finance options, finding the right inventory loan is easier than ever. One factor that might influence the speed of application decisions is the type of inventory being purchased. The inventory lender must complete a field audit to assess the value of the inventory, the time frame might be extended before the borrowing business obtains a decision.

    How would you use inventory financing?

    Businesses use inventory financing to free up cash flow that is held up via inventory that has yet to be sold. This type of financing is especially beneficial for businesses that turn over high quantities of especially valuable inventory because it allows businesses to receive funds immediately based on the value of the inventory on their shelves and the inventory they are attempting to purchase for the future. Inventory financing is used to cover different expenses that may arise and allows business owners to take advantage of new business opportunities by providing an influx of working capital immediately.

    Is collateral required for inventory financing?

    Yes, inventory financing is a specific asset-based lending product. The collateral required for inventory financing is the inventory that the loan is being secured with. The type of inventory being used as collateral and the liquidation cost of the inventory both play a large role to determine the necessary collateral.